25 Apr Templeton
How I see the Franklin Templeton issue
1) It was always known that FT invested in relatively poor credit quality papers
2) For years investors have benefitted from this strategy and made great returns. It suits everyone when all are in money. (However, not all fund houses fell for this lock stock and barrel)
3) The Covid crisis and the lockdown was a clear indicator of ensuing economic hardships. It does not take much to realise that some industries like airline, hospitality, malls and movie halls etc will bear the brunt of the disease
4) People who had a little more understanding of situation had starting talking about the risk of credit risk funds and also that one needs to consider pulling out of Franklin Templeton. Certainly competion too left not stone unturned in fueling the fire.
5) Recently but before Covid Franklin had credit related issues in their funds due to default by Vodafone leading to side pocketing which is splitting the fund into good part which would remain liquid and bad part which would remain illiquid till creditors paid back (no guarantee)
6) This event made people believe everything else that pointed to the negative about Franklin Templeton
7) This led to large redemptions. Many started switching out of credit risk related funds and moving to safer funds or even equity.
8) Due to Covid the market certainly was not liquid or did not have much participation as in crisis people hold on to cash
9) So FT to fund redemptions found it hard to sell its papers efficiently and had to bear losses which got loaded on the investors who stayed in the fund unknowingly as investors rarely understand what all is happening
10) So clearly FT had no option but to wind up the funds.
11) While the investors interest etc was cited by them but the fact is they had no option
12) To some some extent it is true that investors wealth will come back (most of it) but they have to pay a very big price of losing liquidity and control over their own money
13) Liquidity risk is often not understood and appreciated by investors because they take it for granted.
14) Perhaps there is not bigger risk than Liquidity risk which is followed closely by Credit Risk. But we only worry about Market Risk . That is the irony because of lack of investor education
15) The good thing it other fund houses can today come out and boast about the quality of their papers to stem the rot. They have done this under the AMFI umbrella.
16) Run on the market is like run on the bank which gets triggered by panic and this can bring down the financial system.
17) The government which is reeling under the twin crisis of Covid and a hurt economy will not want another crisis to handle and will ensure that enough liquidity is infused into the system to prevent a collapse
18) As Advisors if you understand and not panic and more importantly not spread panic then nobody will get into trouble and the system will stay in equilibrium
19) Because panic can cause unfounded pain for nobody’s fault.
20) Just think about this situation like the recent bank crisis. Just because the crisis hit PMC and Yes Bank it did not spread to the bigger banks like HDFC, ICICI etc
21) Excess panic will keep pull down every system including banking. Sentiments are the backbone of our economy. Stay educated, understand, don’t panic and as they say in the movie Three Idiots – All Is Well